Aussie dollar could dive to 40 US cents: What happens to ASX shares?

How do you feel about paying $50 for a sandwich on your next holiday to New York?

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If you're a keen traveller, you will be acutely aware of how the Australian dollar is going against other currencies.

When the Australian dollar is up around parity with its US counterpart, we feel like a king on international trips. I'll have everything on the menu, waiter!

Conversely, when the Aussie sinks to 60 US cents, spending money overseas becomes decidedly less fun. Fancy a $30 sandwich for lunch?

Of course, the value of our currency has a massive impact on the Australian economy and ASX shares too.

Shockingly Nucleus Wealth chief strategist David Llewellyn-Smith recently predicted that the Aussie dollar would plunge to just 40 US cents in the coming cycle.

Buckle up, everyone. 

A young couple backpacking stand at traffic light and look at map on phone

Image source: Getty Images

External factors that are hammering Australia

In simple terms, a currency becomes devalued if the local economy is not as productive as other nations.

There are several factors buffeting the Australian economy that worry Llewellyn-Smith.

The most immediate concern is interest rates.

"The [US Federal Reserve] is still hiking rates. I think there's at least two hikes to come… and it's possible there'll be more," he said in a Nucleus video.

The hype around artificial intelligence and a hot labour market are helping prop up asset values in the US and is fueling core inflation.

Australia, with a dearth of technology companies, is not suffering from the same "bubble".

The trouble is that the further the US rate streaks ahead of Australia's, the more demand the US currency will enjoy. Subsequently, the Aussie dollar will drop.

The second worry is that Australia's biggest trading partner, China, is seeing its previously heady annual growth reduce to "virtually zero growth".

Llewellyn-Smith fears this is not just a temporary blip but permanent.

"The China bust is just a structural wind-down of its catch-up growth period."

He predicts the Asian giant's growth will "wind down to next-to-nothing". And this will lead to a freefall in iron ore and coking coal prices.

Unfortunately, there are many Australian businesses that hang their fortunes on the Chinese demand for these commodities.

Internal factors that are damaging Australia

Within Australia, there are factors that are choking the economy too.

Firstly, a nation that's dominated by miners and big banks is poorly placed to take advantage of any of the benefits arising from the AI revolution.

"That's likely to result in a stronger productivity surge in the US than Australia, as well as a greater number of winners directly from the AI boom."

Secondly, Australia has not participated in the global "reshoring" pivot, which has come about in the last couple of years.

This has already resulted in many problems, such as sky-high energy costs despite an abundance of supply.

"Productivity is terrible, and we don't have tech."

Many experts consider the 2010s a "lost decade" for Australia as the government squandered massive opportunities.

Llewellyn-Smith fears that the 2020s will be a repeat of this disaster.

"You'd be just growing so slowly that you don't attract much investment flow, and your interest rates tend to fall below everybody else's. So you end up with a much lower currency," he said.

"That's really the scenario in which you might get to a 40-cent Australian dollar."

What should you do with your investments?

The above scenario is directly disastrous for ASX mining shares and any sectors that are reliant on overseas supply.

Export businesses may gain some advantages from the low Australian dollar.

Llewellyn-Smith predicts the Australian dollar will experience "a rollercoaster ride" for the next 12 months as the above issues sort themselves out.

Once the market sees beyond the immediate downturn, the US dollar will fall, and the Aussie dollar will "rocket back".

At this point, he recommends fleeing ASX shares and then putting that money into overseas (especially US) assets.

And definitely avoid resources companies that are exposed to Chinese demand.

After that, he expects a "long grind for the Australian dollar back down again".

By the time the Aussie dollar sinks to 40 cents, your foreign investments will have been boosted by the currency weakness.

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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